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What happens if Greece defaults?

One of the few things all the players in the Greek financial drama agree on is that a default by the cash-strapped country is something that ought to be avoided at all costs -- even though an agreement to prevent that from happening has proven elusive.

With Greece's current bailout set to expire on Tuesday, the country's creditors today offered to extend its financial lifeline by five months and unlock as much as 15.5 billon euros ($17.3 billion) in aid, according to Bloomberg. German Prime Minister Angela Merkel, whose country is Greece's largest creditor, has called on her Greek counterpart, Alexis Tsipras, to accept what she has described as a "generous offer."

Tsipras, who was elected on an anti-austerity platform, however, is balking at the conditions creditors are demanding before releasing additional aid. Negotiations to finally resolve the crisis will continue this weekend.

Greece's economy has been in a shambles for six years. Unemployment tops 25 percent, and the rate of joblessness among the young hovers around 50 percent. Desmond Lachman, a resident fellow at the American Enterprise Institute, likened the current Greek depression to the one the U.S. suffered through in the 1930s.

Although Greece's economy is small, accounting for just around 2 percent of the eurozone's overall GDP, the ramifications of the country's collapse and exit from the euro for the U.S. cannot be ignored, according to experts. For one thing, the European currency would tank, making U.S. exports to the European Union, a key market for many multinational companies, more expensive.

In a worst-case scenario, the U.S. economic recovery could be derailed, and Russia's influence in Europe might grow, according to experts.

The European Central Bank (ECB) might have to take action to prevent the Greek crisis from spreading to the rest of Europe, particularly in Italy, the third-largest economy in the eurozone, which has its share of economic problems.

"While the euro can very well survive without Greece, it is difficult to imagine how the euro could survive if Italy were to eventually follow Greece out of the euro," according to Lachman of the American Enterprise Institute.

Economists are pessimistic that the Greek financial drama will end happily even though Tsipras had recently offered concessions on key issues such as taxation and increasing the retirement age. Many expect Greek banks to implement capital controls to prevent a mass exodus of funds. Deposits have already slumped around 20 percent since the start of the year, and the banking system would probably collapse without further assistance of the ECB.

Indeed, economists at TD Securities argued that even if a bailout extension is agreed to this weekend, it's doubtful that it would last because Greece, unlike other European countries facing economic challenges, has been more willing to risk sending its economy into a fiscal abyss.

"They are absolutely so close, that in any other episode of the eurozone crisis in every country over the last five years, there would have quickly been a deal, which is what we argued into every previous last-minute negotiation such as this one," TD Securities said in a note to clients today.

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